PIMCO is looking to expand its use of credit default swaps because, in addition to being useful hedging tools, CDS also allow it to express a greater variety of views than are otherwise possible in the cash market, Hinman explained in a panel session at the recent International Swaps and Derivatives Association's annual general meeting in Chicago. For example, credit derivatives may allow managers to take a long position on a name even when the underlying cash instrument is illiquid.
Despite improvements in liquidity, however, credit derivatives still do not offer the same flexibility as some markets, such as Treasuries, in which practically any view can be expressed through the cash and derivatives markets. For example, liquidity in short-dated credit default swaps still lags liquidity in contracts with tenors of five years and longer.
Hinman also believes liquidity in credit indices such as iBoxx and TRAC-X is not all it could be. If it is possible to purchase bonds issued by Ford, one of the most liquid names, in USD100 million lots it should also be possible to execute larger trades on credit derivatives indices with tight bid/offer spreads.
PIMCO has been using credit derivatives since 1999 and employs the instruments to both hedge and take positions, for example in relative-value trades, Hinman said.
